CBA Record January 2018

Frequently Asked Questions About Bitcoin and Cryptocurrency

What is Bitcoin? Bitcoin is currently the most widely-known cryptocurrency. Other examples include Ethereum, Litecoin and Monero. What is Cryptocurrency? Cryptocurrency, sometimes referred to as “virtual cur- rency”or“digital currency,”is a digital representation of value that functions as a medium of exchange, a unit of account, and a store of value. Cryptocurren- cies can operate like government currencies, but do not have the backing of a government. Can Cryptocurrencies be Exchanged for Government-backed Currencies like U.S. dollars? Some cryptocurrencies can be purchased and sold for U.S. dollars or other government currencies. Others, however cannot be exchanged for government- backed currencies and only have value on certain virtual networks. What is a Convertible Cryptocurrency? A convertible cryptocurrency has an equivalent value in government-backed currency. It can be bought or sold for government currencies. For example, Bitcoin can be traded for U.S. dollars. This process is similar to trading U.S. dollars in for euros before traveling to Europe. However, a cryptocurrency is not legal tender; its value is not backed by a government. What is the Process for Cryptocurrency Transactions? The process varies among cryptocurrencies. In general, the process will involve some or all of the following: a decentralized user-to-user computer network connected by open-source soft- ware, encryptedmessages among users, and a permanent, publicly-distributed ledger where “blocks” of transactions are added after being validated by the users. What is the Distributed Ledger? The distributed ledger is the account of all network-validated transactions in a particular cryptocurrency. These transac- tions are permanently affixed in the ledger. Subsequent transactions are added to the end of the ledger. In theory, one can take the distributed ledger and see every transaction that has occurred globally in a given cryptocurrency, from inception to the present. What is Blockchain? Blockchain, also known as distributed ledger technology, is the process bywhich the computers of certain users in a cryptocurrency network validate a block of transactions. After consensus among users (called“miners”) is reached concerning the block, the transactions are irrevocably logged on a

permanent public distributed ledger, which is visible to the entire network. How Can I Invest in Cryptocurrencies? Websites and apps, like Coinbase and Gemini, offer opportunities to acquire themore established cryptocurrencies, like Bitcoin, Ethereum and Litecoin, for U.S. dollars. In addition, futures exchanges such as the CME and CBOE have begun offering Bitcoin futures. Are There Cryptocurrency Scams? Yes. The cryptocurrency market is filled with get-rich-quick schemes, Ponzi schemes, pump-and-dumps, and outright frauds. Fraudsters are emboldened in part by the anonymity that comes with many cryptocurrency transactions, their overseas presence and perceived immunity fromU.S. laws, and the largely erroneous belief that cryptocurrency transactions escape federal or state regulation. Who Is Regulating Cryptocurrency? The Commodity Futures Trading Commis- sion (“CFTC”), Securities and Exchange Commission (“SEC”), Internal Revenue Service (“IRS”), and state actors such as the Illinois Department of Financial and Professional Regulation (“IDFPR”) regulate various aspects of the cryptocurrency market. Where Can I Learn More? The following sources provide additional information: –CFTC, Primer on Virtual Currencies (Oct. 17, 2017): http://www.cftc.gov/idc/ groups/public/documents/file/labcftc_primercurrencies100417.pdf. –SEC, Statement on Cryptocurrencies and Initial Coin Offerings (Dec. 11, 2017): https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11. – SEC v. Recoin Group Foundation, LLC, (S.D.N.Y 2017) (Complaint): https://www. sec.gov/litigation/complaints/2017/comp-pr2017-185.pdf –National Futures Association, NFA Investor Advisory—Futures on Virtual Currencies Including Bitcoin (Dec. 1, 2017): https://www.nfa.futures.org/ investors/investor-advisory.html. –IRS, VirtualCurrencyGuidance:VirtualCurrencyIsTreatedasPropertyforU.S.Fed- eral Tax Purposes; General Rules for Property Transactions Apply, (Mar. 25, 2014): available at https://www.irs.gov/newsroom/irs-virtual-currency-guidance. –IDFPR, Digital Currency Regulatory Guidance (June 2017): https://www. idfpr.com/news/pdfs/idfprrequestforcommentsdigitalcurrencyregulatoryguid- ance2016.pdf

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